By Ben Hirschler

LONDON (Reuters) - How many people does it take to run a successful biotech company? Just two, judging by the sale of XO1, a one-drug British firm snapped up last month by Johnson & Johnson.

Ten years on from pioneering an ultra-lean business model focused on investing in "virtual" companies with a single experimental medicine, XO1's backer Index Ventures is chalking up some notable wins.

XO1, spun out of Cambridge University research to develop a novel anti-blood clotting drug, is the eleventh biotech firm to be sold from a portfolio of 34 so-called asset-centric biotech companies created by Index since 2005.

"The ruthless focus you get from having a one-molecule company decreases the cost per project and dramatically improves the quality of decision-making," Index partner Francesco De Rubertis, a former scientist said.

The approach also accelerates the investment life cycle, with Index holding its single-drug businesses for an average of around 4-1/2 years, or roughly half the industry average.

The new model has grabbed attention as venture capitalists strive to improve returns in a notoriously risky sector, and it has been mirrored by other venture firms such as Symphony Capital, Atlas Venture and CMEA Capital in recent years.

The strategy is in sharp contrast to the traditional idea of building a fully integrated drug company and it depends on tapping into an ecosystem of out-sourced specialists who can be parachuted in to work on different facets of drug development.

In the case of XO1, this meant that while there was a conventional board of directors, every aspect of the company's creation from accounting to drug manufacture was contracted out, resulting in only two full-time employees.

David Grainger, another Index partner, believes it might one day be possible to take the virtual company to its logical extreme by having zero employees.


In the case of XO1, the sole aim was to develop the antibody drug ichorcumab as quickly as possible and then clinch a deal with a large drugmaker to realize a decent return on an initial investment of $11 million in 2013.

Financial details of the J&J transaction have not been disclosed but De Rubertis says Index and its investors are "very pleased" with the big payback they have seen on an asset that is still in preclinical development.

Significantly, J&J was already in the loop on the potential of ichorcumab - a blood thinner that appears to avoid bleeding risks - since XO1 was nurtured under a $200 million fund set up by Index that was backed by both J&J and GlaxoSmithKline.

Other notable exits from Index's previous asset-centric investments include PanGenetics, sold to AbbVie in 2009; OncoEthix, sold to Merck & Co last year; and Aegerion Pharmaceuticals, which floated on Nasdaq in 2010.

The proliferation of external service providers means it has become a lot easier to create a virtual drug company. But challenges remain, particularly when it comes to scaling up the strategy, given the "human capital" still needed to decide the right pathway for developing individual drugs.

And the approach is only suitable for certain types of drugs, where it is possible to achieve a meaningful proof-of-concept that the medicine works at an early stage of development. That would seem to rule out areas like Alzheimer's, where far longer studies are needed.

(Editing by Angus MacSwan)